The Senate Buffets the Buffett Rule

by Burt on April 17, 2012

Hooray! On Monday night the Senate defeated the Buffett Rule by a vote of 51-45. No special tax on millionaires this time around, and that’s good news to help bolster the anemic economic recovery in the U.S.

What has happened in the past when the U.S. launched special taxes against rich people? Answer: It didn’t work. Let’s look at some historical examples.

The Sixteenth Amendment, allowing an income tax, became law in 1913, which was President Woodrow Wilson’s first year in office. In the first income tax, the top rate was set at 7% on all income over $500,000–a kind of millionaire’s tax for its day. In 1916, Wilson supported a hike in the top rate to 15%. By the end of his presidency, two years after World War I, the top rate had skyrocketed to 73%. In other words, what started as a small tax on rich people soon mushroomed into a gigantic tax on those who made lots of money.

Some might say, so what? They can pay it. But in fact they didn’t. The rich invested their cash in tax-exempt bonds, art collections, and foreign investments. They refused to pay three-fourths of their earnings to the government. As a result, the U.S. lapsed into a recession and faced 12% unemployment in 1921. Fortunately, Presidents Harding and Coolidge cut that top marginal rate to 25%, and so much economic investment came pouring into the U.S. during the Roaring Twenties that American unemployment dropped to a 3.3% average from 1923-1929. GNP grew substantially and revenue from the income tax had actually increased by 1929 from what it was earlier in the decade.

In a similar manner, President Reagan faced a recession, high unemployment, and economic stagnation when he was elected in 1980. The top marginal income tax, for example, had been hiked back to 70%. He launched a series of tax cuts getting that top rate down to 28%. And revenue from the income tax almost doubled into the federal government during the 1980s. Reagan also watched as unemployment and inflation fell sharply during his presidency.